Column-How a historic Social Security hike will affect Americans

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(C) Reuters. People wear masks as they pass through a pedestrian subway as cases of the infectious coronavirus Delta variant continue to rise in New York City, New York, U.S., July 26, 2021. REUTERS/Andrew Kelly/Files

By Mark Miller

CHICAGO (Reuters) – (The opinions expressed here are those of the author, a columnist for Reuters)

A 6 percent raise does not come along often these days for most Americans, but a bump of that magnitude in Social Security benefits is on the way for 2022.

Reflecting unusual pandemic-driven inflation this year, Social Security recipients will see a 5.9% cost-of-living adjustment (COLA) next year – the largest since 1982. The annual COLA – announced on Wednesday by the Social Security Administration – will go to more than 64 million recipients of Social Security, and 8 million who receive Supplemental Security Income.

COLAs also affect people who are eligible for Social Security but have not yet filed for benefits. So, if you are 62 now and wait to claim later, your benefit will be adjusted to reflect the 5.9% COLA for 2022, and any subsequent COLAs awarded before you claim.

The COLA is one of Social Security’s most valuable features because it holds benefits steady against the erosion of inflation over time. Experts often debate whether it accurately measures the inflation experienced by seniors, but the COLA makes Social Security an inflation-adjusted annuity – which would be very costly to buy in the commercial annuity market.

Inflation consistently surfaces in surveys as one of the top worries of retirees. That is because seniors generally live on fixed incomes. During the past 12 years, however, overall inflation remained generally calm, and COLAs have averaged a meager 1.4 percent.

Social Security benefits have lost 32% of their buying power since 2000, according to The Senior Citizens League, which tracks inflation affecting seniors. The large COLA will be welcome news, but rising food, rental housing, home ownership, home heating oil and natural gas and prescription drug prices are areas of worry, says Mary Johnson, the League’s Social Security and Medicare policy analyst.

“We’re hearing from a lot of seniors worried that they can’t afford to buy groceries because they’re running out of money at the end of the month, or that they can’t afford their prescription drugs – maybe they’re taking them every other day or cutting their pills in half.”

And the high COLA this year could be followed by smaller ones in the next couple of years if inflation cools down.

The COLA was roughly double the 3.1% increase that the Social Security trustees had been forecasting, noted Stephen Goss, chief actuary of the Social Security Administration, during a webinar on the COLA on Wednesday convened by the Bipartisan Policy Center.

“We do think that this additional increase over the 3.1% forecast will be at least partially offset in the coming years by COLAs that will be somewhat smaller than we otherwise would have expected,” Goss added.

COMING SOON: THE FINAL NUMBERS

The Social Security COLA is determined by an automatic formula that averages together the third-quarter figures for the consumer price index for urban wage earners and clerical workers (CPI-W). The headline figure for 2022 released on Wednesday is not the final word on the increase seniors will see next year.

Part B Medicare benefits usually are deducted from Social Security benefits. That figure typically is released later in the fall, but the Medicare trustee report issued in late August forecast a 2022 standard Part B premium of $158.50 a month, an increase of $10, or 6.3%, compared with this year.

That would still leave most retirees with a substantial COLA. For example, if your monthly benefit is $1,500, it would translate into a gross COLA of $88.50; that would be reduced to $78.50 if the Part B premium does indeed jump by $10.

Higher-income seniors could see their COLA effectively clipped by higher taxation of their benefits. Taxes are owed on “combined income,” which includes your adjusted gross income plus nontaxable interest plus 50 percent of your Social Security. This only affects beneficiaries with combined income equal to or above $25,000 for single filers and $32,000 for married filers – but the ceilings are not adjusted for inflation.

The high COLA also could push more seniors into Income-Related Monthly Adjustment Amounts (IRMAA) – a surcharge tacked on to the standard Medicare Part B premiums for enrollees with modified adjusted gross income over certain levels.

Johnson urges seniors to pay careful attention to any of these possible changes. “You may want to set aside more to pay those bills,” she says.

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